Big Lots 2012 Annual Report Download - page 134

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 — Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Store Pre-opening Costs
Pre-opening costs incurred during the construction periods for new store openings are expensed as incurred.
Share-Based Compensation
Share-based compensation expense is recognized in selling and administrative expense in our consolidated
statements of operations for all options that we expect to vest. We estimate forfeitures based on historical
information. We value and expense stock options with graded vesting as a single award with an average
estimated life over the entire term of the award. The expense for options with graded vesting is recorded
straight-line over the vesting period. We estimate the fair value of stock options using a binomial model. The
binomial model takes into account variables such as volatility, dividend yield rate, risk-free rate, contractual
term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the
probability of retirement of the option holder in computing the value of the option. Expected volatility is based
on historical and current implied volatilities from traded options on our common shares. The dividend yield on
our common shares is assumed to be zero since we have not paid dividends and have no current plans to do so
in the future. The risk-free rate is based on U.S. Treasury security yields at the time of the grant. The expected
life is determined from the binomial model, which incorporates exercise and post-vesting forfeiture assumptions
based on analysis of historical data.
Compensation expense for performance-based non-vested restricted stock awards is recorded based on fair
value of the award on the grant date and the estimated achievement date of the performance criteria. An
estimated target achievement date is determined at the time of the award based on historical and forecasted
performance of similar measures. We monitor the projected achievement of the performance targets at each
reporting period and make prospective adjustments to the estimated vesting period when our internal models
indicate that the estimated achievement date differs from the date being used to amortize expense.
Earnings per Share
Basic earnings per share is based on the weighted-average number of shares outstanding during each period.
Diluted earnings per share is based on the weighted-average number of shares outstanding during each period
and the additional dilutive effect of stock options and non-vested restricted stock awards, calculated using the
treasury stock method.
Guarantees
We have lease guarantees which were issued prior to January 1, 2003. We record a liability for these lease
guarantees in the period when it becomes probable that the obligor will fail to perform its obligation and if the
amount of our guarantee obligation is estimable.
Foreign Currency Translation
The functional currency of our international subsidiary is the local currency of the country in which the
subsidiary is located. We have one foreign subsidiary domiciled in Canada. Foreign currency denominated
assets and liabilities are translated into U.S. Dollars using the exchange rate in effect at the consolidated balance
sheet date. Results of operations and cash flows are translated using the average exchange rates throughout
the period. The effect of exchange rate fluctuations on translation of assets and liabilities is included as a
component of shareholders’ equity in accumulated other comprehensive income (loss). Gains and losses from
foreign currency transactions, which are included in other income (expense), were $(0.4) million for 2011 and
immaterial for 2012.